Safe Money - 3-8-25

Episode Transcript

Speaker 1 (00:00):
Good morning to all. Craig Shillig here and this is
Safe Money. I'm here every Saturday to talk with our
listeners about financial strategies we use to manage and protect
assets safely. I've been an insurance agent for over twenty
four years. During that time that I've learned a few
insurance strategies, like using annuities as safe money harbors or

(00:22):
using cash value life insurance to supplement retirement income. Just
a reminder, you can call our office at five six
three three three two two two zero zero if you'd
like to enroll into one of my virtual Medicare community meetings.
I do those via zoom. I do two every month,

(00:43):
or you can email me at Craig at Craigshillig dot
com and that's my name, cr Aig at cr AI
G S C H I L l ig dot com. Today,
I'd like to discuss annuity tax benefits, is state legacy

(01:05):
benefits and the difference between an annuity and a mutual fund.
Three key and potentially overlooked tax benefits of fixed indextinuities.
Most clients are probably familiar with four to one ks
and iras, but there are other tax advantage retirement products
that can be purchased with non qualified money. A fixed

(01:29):
indextinuity funded this way combines growth potential and protection from
market downturns with tax benefits that can complement other financial vehicles.
Here are three tax benefits of fias that they can offer.
One thing about fias there's no contribution limits. While qualified

(01:52):
plans like four to one ks and iras offer tax advantages,
they also have caps how much money can be contributed
each year without irs imposed contribution limits on non qualified funds.
Fixed indextinuities may appeal to clients who have maxed out
their annual four to one K and IRA contributions. Secondly,

(02:18):
there's tax deferred growth in fias with interest credits tied
to the performance of a stock market index. Fias give
clients the potential to benefit from index gains without investing
directly in the market. That means you have upside potential
with a guaranteed floor. The growth within an FIA is

(02:42):
not taxed until it's withdrawn, similar to retirement savings vehicles
such as a four to one K and a non
roth IRA. Because fixed index ainuities can also help protect
retirement savings from market downturns, there is less downside risk
then you would have a four to one K or

(03:04):
an IRA asset that is invested directly in the market.
There are no additional tax benefits to purchasing a fixed
indextinuity within a qualified account. Item three, there's favorable tax
treatment for retirement income. Withdrawals from qualified accounts like four

(03:29):
to one ks and iras are fully income taxable. However,
clients only pay taxes on interest earned in a fixed
indextinuity funded with non qualified money, since its income may
consist of interest and the client's original premium. Only a

(03:50):
portion of a fixed indextinuity distribution may be taxable. This
feature can help clients use non qualified I'D fixed indextinuity
income in conjunction with fully taxable withdrawals from other sources
to help lower their overall tax burden during retirement. So

(04:15):
a couple important FIA reminders. Fixed indextinuity is funded through
a rollover from a tax qualified vehicle are subject to
the same tax rules as an IRA or a four
one K. So that means if you take money from
a four oh one K and put it in a
fixed indextinuity, you're still going to have that income tax

(04:35):
rule like a four O one K and an IRA.
An FIA may be subject to federal and state income tax, and,
except under certain circumstances, will be subject to an IRS
penalty if payments start before the owner reaches the age
of fifty nine and a half, Withdrawals that exceed the

(04:56):
free withdrawal amount allowed maybe subject to a WITHI draw
charge or a possible market value adjustment known as an MAV,
which could result in the loss of principle. So the
big picture here with their tax benefits and the ability
to provide growth potential and protection from market downturns. Fixed

(05:20):
index ainuities can play an important role within a true
retirement savings plan. They can also complement other sources of
growth potential and retirement income, including They work great with stocks, bonds,
and mutual funds held in a taxable brokerage account, savings

(05:42):
in a tax deferred account like a four to one K,
other tax advantage vehicles such as a roth IRA. Using
a mix of these tools and staying current on tax
changes for the year can be vital to helping climcience,
manage risk and provide growth potential before and after retirement.

(06:06):
So let's talk about indextinuities and mutual funds. What's the
difference between the two. Retirement requires a whole new perspective
on your portfolio. Instead of focusing solely on growth, you're
now tasked with creating a plan to spend down your
assets while also helping ensure those assets will comfortably last

(06:28):
through your retirement. Your approach to risk may change as
a result. As you consider your financial goals and obligations,
It's natural to reconsider how you view various accumulation and
income generating options. A common comparison is at a mutual

(06:49):
fund versus an indexinuity. So I've outlined some things you
need to know about how they work and their similarities
and differences. The difference between a mutual fund and a
fixed indextinuity. While both track the performance of securities, they
work differently and involve different levels of risk. Each was

(07:11):
design for a different purpose, and as I'll explain, both
can be a good fit dependent on your true retirement goals.
A mutual fund is an investment vehicle whose value fluctuates
depending on the performance of its underlying securities. An investor

(07:33):
who buys shares of a mutual fund is investing, albeit indirectly,
in those securities. Because mutual funds are invested in a
range of companies based on what the fund owns. Investors
often use mutual fund investments to diversify their portfolios, but
this means that the investment is tied to market performance.

(07:55):
If the fund performs well, the investor gains, but if
the fund doesn't doesn't do well, the investor stands to
lose money, including their principle. A fixed index annuity I
refer to them as fias gives you the opportunity to
earn interest credits based on, in part, the upward movement

(08:18):
of a stock market indicy or an index. But fixed
indexinuities are not stock market investments and they do not
directly participate in any stock or equity. You're not exposing
your money to the risk that investment entails, and your
principle and any accumulated interest are protected from loss due

(08:40):
to market downturns. Fixed indexinuities may also offer writers that
allow you to customize your annuity. For example, you can
provide guaranteed lifetime income and retirement, or you can create
a legacy for your heirs. Keep in mind that writers
typically come with hr charch that could exceed any interest credited,

(09:03):
resulting in a loss of principle. So let's talk about
how mutual funds work. And a mutual fund, investors pool
their funds to purchase shares in a basket of equities,
typically stocks and bonds. When the fund performs well, all
investors benefit from the fund's growth. When the fund performs poorly,

(09:24):
all investors are exposed to loss. The appeal of investing
mutual funds is their growth potential. Additionally, mutual funds are
more liquid than some other products. While there are different
types of mutual funds out there, investors most often receive
regular distributions based on the fund's performance. Now, how do

(09:48):
you fix index annuities work? Fias are insurance products that
offer growth potential tied to the performance of an underlying
market index. With an FIA, your money isn't directly invested
in stocks, bonds, or any other investments. Instead, interest is
credited based on the percentage gain in that index, limited

(10:12):
by a cap or other mechanism that allows the insurance
company to provide protection from loss if that index were
to decline. So let's talk about how growth works in
a mutual fund and fis so when we're talking about
growth in a mutual fund. When you invest in individual

(10:35):
stocks through a mutual fund, the returns generated by that
stock directly impact the value of your mutual fund shares.
In essence, the value of your share is tied directly
to the combined returns of all the funds underlying securities,
minus any mutual fund expenses. With a fixed index, annuity

(10:58):
growth is tied to the performance of an index. This
index could be a benchmark index such as the S
and P five hundred NAS deck. There's some balance funds
out there. There's even some AI indices out there that
I'll talk about in a later show. The annuity holder

(11:18):
then has the opportunity to allocate their annuities accumulated value
to one or more index interest crediting strategies. Interest credits
are determined by the performance of an underlying market index
modified by a mechanism that limits the interest credits, like
a cap spread or participation rate. What do I mean

(11:41):
by that? Caps spreads or participation participation rates are the
charge you pay for having a guaranteed floor because remember,
you'll never lose your principle. For example, let's say their
participation rate was sixty percent and the stock index gained
eight percent, the credited yield, which is the interest you

(12:03):
would make from the annuity, would be sixty percent times
eight percent, which equals four point eight percent. Because formulas
can vary from annuity company to annuity company, we recommend
you can sold a financial advisor about how to compare
some of your options out there there are. I mean,

(12:24):
four point eight doesn't sound like a great deal, but
if the market tank thirty percent, four point eight looks
pretty good. So avoiding losses and mutual funds and fixed indextinuities.
Mutual funds and fias balance risk and reward in very
different ways. A mutual fund participates fully in the gains

(12:45):
and losses of its underlying investments. Generally, if those securities
collectively gain or lose twenty percent of their value over
the year, the value of your mutual fund shares will
also gain or lose twenty percent. On the other hand,
a fixed index annuity it provides protection from loss due

(13:06):
to stock market downturns. While it's possible to earn zero
percent interest in any given crediting period, you cannot earn
less than zero due to a market decrease. So let's
talk about accessing funds. The two products differ in terms
of liquidity or how easily you can access your money.

(13:30):
Shares of mutual funds can be bought and sold daily,
with some limitations on selling shares soon after their first
purchased as a way to deter short term trading. Fixed
index annuities are designed to help you achieve a long
term savings an income goal. An income goal, if you

(13:54):
would draw more than the free wouldraw amount specified in
your annuity contract act, the excess withdrawals will be subject
to a withdrawal charge and an MVA known as a
market value adjustment if applicable. In addition, any withdrawals before
age fifty nine and a half will result in an
IRS mandated early ten percent early withdrawal penalty. Other differences

(14:20):
between mutual funds and fixed indextinuities. Tax considerations also differ
between mutual funds and fix indextinuities. Fixed indexinuities, for example,
offer tax deferred growth. You pay no taxes on the
growth within the annuity until you receive a payment or
make a withdrawal. With some mutual funds, if the fund

(14:44):
manager sells an asset and realizes a gain, you could
be subject to taxes on that gain, even if you
haven't sold any of your shares. So mutual funds, if
they pay dividends or they declare a new dividend, you
could get a ten ninety nine at the end of
that year based on that mutual fund dividend. There are

(15:08):
also different fee structures and different approaches to management. Fixed
indexinuities tend to see fewer fee chart changes because they're
designed to be long term holdings. Fee amounts are set
from the onset, where with mutual funds, on the other hand,
fees can go up as the size of the fund's

(15:30):
portfolio grows. Both mutual funds and annuities can be valuable
components of your portfolio, but it's important to have a
full understanding of how both work as tools and how
they can help you reach your goals. Let's talk about
the role of annuities in a state planning. Fixed indexinuities

(15:54):
offer a combination of growth potential and protection that can
play an important role in a clickian's retirement plan. Fias
offer another aspect that financial professionals and clients might overlook.
They can be an integral part of an estate plan.
So let's talk about four ways fixed indexinuities can add

(16:17):
to your client's overall plan. So one of the four
ways is the flexibility of leaving a legacy. Many fixed
indexinuities offer the ability to leave a legacy a death
benefit that can provide a guaranteed source of funds for
family members. These benefits can be built into the base

(16:39):
contract or offered as an optional writer available for an
additional cost, and their flexibility helps clients tailor their estate
plan to their specific needs. For example, they may allow
the option of a surviving spouse to continue receiving guaranteed

(16:59):
income from the remainder of their lives. Alternatively, clients who
want to protect their non spouse errors may be able
to choose from several different death benefit options. This is
a nice flexible way to do this. If you have
two or three children, and say two are financially a

(17:20):
stud but one is maybe a spendthrift. This way, upon death,
they would still receive an income, they just wouldn't burn
up the asset in three to five years. A typical
annuity death benefit allows a beneficiary to receive the hire
of a guaranteed minimum amount or the accumulation value as

(17:46):
as of the latest contract anniversary. Some annuities will provide
a return of premium benefit, which gives airs the return
of the annuity owner's initial premium payment or the accumulation value.
As I mentioned before, some plans also have legacy writers

(18:06):
that may offer a guaranteed increases to a benefit base
amount determined to issue, or through credits based on any
interest earned in the base contract. In addition to the
array to the array of legacy options available, beneficiaries can
also often choose how they receive the funds. For example,

(18:30):
they may be able to take a lump sum up front,
they could take a regular stream of payments for a
period of time, say over five or ten years, or
they could just defer receiving payments at that time and
take them at a later date. Let's see another item.

(18:53):
Annuity contracts avoid probate. The probate process can delay errors
from receiving assets. What's more, probate can be expensive. Between
court costs, attorney fees, appraiser fees, probate costs as much
as five percent of the value of that estate. Annuities
and life insurance fall under contract law, so they transfer

(19:17):
based on beneficiary designation. So whoever the beneficiary designated on
that contract, all they have to do is fill out
a claim form and most claims can be settled in
less than thirty to forty five days. Clients may value
in a state plan that includes ways to avoid probrate

(19:39):
whenever possible. Fixed index annuities allow owners to specify a beneficiary.
They may also allow clients to pass on a portion
of their wealth without having to go through the probate
court process. Tax benefits also for surviving spouses. Annuities that
are passed on to a spouse typically or not included

(20:03):
as part of that taxable estate. This tax treatment may
appeal to wealthier clients whose families are likely to face
in a state tax bill. I run into a lot
of farmers that fall into this trap. Okay, if the
death benefit passes to a beneficiary who's not this spouse, however,

(20:27):
that would be included in a taxable state. Also note
that payments collected by a beneficiary can sometimes be subject
to income tax if it's not an immediate spouse or
a family member. There's also growth potential. Fixed index annuities

(20:47):
offer interest rates that are partly tied to the performance
of an underlying stock market index. This feature allows clients
to benefit from market gains without investing directly in stocks,
which can or tect savings from market downturns. Including a
fixed indextinuity in an state plan may help clients increase

(21:08):
the amount of money available to pass on to their errors.
Growth within a fixed indextinuity can be used to increase
the legacy that's available for errors when an optional writer
is chosen. Alternatively, clients have the freedom to use income

(21:29):
from an annuity however they choose. Perhaps they may decide
to pay for everyday retirement expenses like food and transportation,
allowing them to leave other assets untouched, which will help
preserve wealth to pass on as a legacy to a
future generation. In a future show i'll talk about coming

(21:54):
up the next couple of weeks, I'm going to talk
about I'll talk more about annuities in life insurance. I
will also talk about social security and some of those items,
and then later down the road, I'm going to talk
about a specific product known as from a company called Athene.

(22:14):
Athene's out of West des Moines, and they have some
pretty cool fixed indexed annuities with some strategy allocation portfolios
that are tied to AI artificial intelligence, and I'm going
to talk about those in the future and uh so

(22:34):
stay tuned for those kind of neat Uh there, it's
a new trend. It's new, but uh it's gaining some traction.
So your kids may talk about AI and you may
dismiss it, but I'm here to tell you it's here
to stay, and it's going to get better and it'll

(22:54):
probably uh change our lives here, if not sooner than later.
But it is in the market and it's pretty interesting,
don't forget. I give monthly virtual meetings regarding Medicare for
two different companies every month. In one meeting, I'll cover

(23:16):
the Medicare Supplement plan with a standalone drug plan. That
meeting sponsored by well Mark. United Healthcare is a sponsor.
For my other virtual meeting, I'll focus on Medicare Advantage
plans known as Medicare Parts C and cover the benefits
of that platform. Some of my upcoming dates are going

(23:39):
to be got them right here, So my next ones
are going to be March eighteenth and twentieth. In April,
it'll be April fifteenth and April seventeenth, So on the
Tuesdays I do and it's usually the third week of
the month. On the Tuesdays I do TheMark meeting, and

(24:01):
on the Thursdays I do the United Healthcare Meeting. My
May dates will be May tenth and May twenty second,
and if you need future dates just let me know.
You can call our office at five six three three
three two two two zero zero for the zoom meeting

(24:21):
codes and additional dates and times. You're also welcome to
email me at It's my name Craig at Craigshillig dot
com and that's cr ai G at c r AI
G S c h I L l I G dot

(24:43):
com and be happy to send you the virtual zoom
Link meeting codes. This is Craig Shillig with Safe Money.